Differences and Similarities between Perfect Competition and Monopolistic Competition

Differences and Similarities between Perfect Competition and Monopolistic Competition

Following are the similarities between perfect competition and monopolistic competition. There are large numbers of firms under both market structures. Firm competes with each other and there is freedom of entry and exit from the industry under both market structures. Freedom of entry and exit means no barriers to9 entry or exit. In both market structures the equilibrium is established at a point where marginal revenue is equal to marginal cost. Firms can earn supernormal profit, normal profit or subnormal profits (losses) in short run under perfect competition as well as under monopolistic competition. In long run under both market structures firm always earn normal profits. Average revenue curve (AR) acts as a demand curve under both market structures.

Differences between perfect competition and monopolistic competition is that under perfect competition each firm produce and sell homogeneous products while there is product differentiation under monopolistic competition.

Under perfect competition prices are determine by demand and supply forces for the entire industry. Each firm has to sell its product at that price. Thus each firm is the price taker and quantity adjuster. Under monopolistic competition every firm has its own pricing policies.

Under perfect competition demand curve (AR) is perfectly elastic and marginal revenue curve (MR) coincides with it. As against this the demand curve (AR) is elastic and downward slopping and its corresponding marginal revenue curve lies below it.

As the equilibrium conditions of the two markets situations are same, yet there is difference in price and marginal cost (MC) relationship. Under perfect competition price is equal to average revenue and marginal revenue. P=AR=MR

This is called double equilibrium condition .This is because average revenue curve is horizontal to x axis. Under monopolistic competition price is equal to average revenue but is not equal to marginal revenue rather average revenue is greater than marginal revenue. P = AR > MR

In long run competitive firms are of optimum size and produce to their full capacity because Price = LMC = LAC at its minimum. But under monopolistic competition the firms are of less than optimum size and possess excess capacity because average revenue curve (AR) is downward slopping and cannot be tangent to LAC at its minimum.

Another difference between perfect competition and monopolistic competition relates to the selling cost. There is no selling problem under perfect competition as products are homogeneous. But under monopolistic competition where products are differentiated selling cost are essential to push up the sales. They are incurring to persuade the buyer to purchase one's product in preference to another through advertisement. There is no advertisement under perfect competition while advertisement is the backbone for monopolistic competition.

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